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Penn State banks on big dividends from Franklin's contract

By MARK WOGENRICH/ (Allentown) Morning Call

Posted:
03/16/2014 11:11:40 AM EDT

Updated:
03/20/2014 12:34:24 PM EDT

Fans at Beaver Stadium. (Joe Rokita)

More money, James Franklin said, will not change him. He still expects to receive a $200 allowance from his wife, Fumi. And he said he's not interested in how that fraction of his $25.5 million deal with Penn State appears.

"I have not seen a check since I got married," Franklin joked on being named Penn State's head football coach in January. "I don't even know if it's direct-deposit. I think we got a fair contract for Penn State, and I think it's a fair contract for James Franklin."

Following a fiscal year that produced a $6 million deficit, Penn State's athletic department this year wrote the most lucrative contract in school history. Franklin's six-year deal guarantees him $4.25 million annually, with retention bonuses and incentives adding up to $1.3 million more per year.

It's a significant investment for a self-supporting athletic department that has gone from budget surplus to deficit in two years, according to Penn State's NCAA financial filings. Total revenue fell about 3 percent in 2013 and expenses rose, in part because of coaching salaries and severance payments.

But, as Penn State's athletic director said, the investment in Franklin was fundamental not just to the football team.

"The head football coach understands that he's part of a greater whole," Dr. Dave Joyner said. "Having said that, you have to focus on your financial engine and do what you can, because that helps all the other sports. It's the economics of college athletics and football. By having a great coach, it drives that great engine."

Penn State's football team essentially supports the university's 30 other varsity sports that annually produce a net deficit — not including the two hockey programs that debuted this school year. So when football revenue falls, the whole department is affected.

In fiscal year 2013 (July 2012 to June 2013), Penn State's football revenue fell 20 percent, contributing to a $6 million athletic department deficit, according to the university's most recent NCAA filing.

Penn State attributed the budget shortfall to several factors: lower football attendance, decreased contributions, the impact of NCAA sanctions (including the bowl ban) and increased expenses, primarily due to "coaching turnover."

As a result, Penn State's athletic department last year proposed borrowing $30 million to help bridge a cash-reserves deficit projected to last until 2017-18. The department is targeting $10 million of that money for operations and capital projects this spring, a university spokesperson said.

Franklin, who begins his first spring practice at Penn State on Monday, said he understands the financial challenges the athletic department faces. He added that the football team can begin addressing those challenges in September.

"We've taken a hit financially, and I understand there's a business aspect of this [job] as well," Franklin said. "If we want to continue to build and go where we want to go, we're going to have to meet those needs. Being able to sell season tickets and sell the stadium out is the No. 1 thing we have to do."

Less money in, more out

Penn State's three most recent NCAA financial filings revealed an athletic department that has spent more and made less. Some of that was circumstantial.

In 2012, Penn State athletics reported an overall revenue drop of about $7.9 million, an initially surprising number that later was clarified. Penn State attributed 90 percent of the decrease to Beaver Stadium club-seat and suite-renewal payments that were collected the previous year. Those one-time, up-front payments were not realized, or budgeted, for 2012.

Over the past two years, Penn State paid out more than $2.5 million in severance, including payments to the late Joe Paterno's staff that left in 2012. Salaries, including those paid to coaches, administrators and support staff, increased by nearly $3.7 million during the transition to Bill O'Brien's staff.

Football salaries rose again with Franklin's hiring. In addition to the head coach's contract, Penn State allotted more money for assistant football coaches. Former Sen. George Mitchell, the university's athletics integrity monitor, noted in his latest report that Penn State's salary pool for assistant football coaches is the second-highest in the Big Ten.

Overall, Penn State's athletic expenses increased by more than $9 million from 2011-13. Debt service also increased as the athletic department partly funded the first two $12 million installments of the NCAA's $60 million fine through an internal loan. Penn State incurred $10 million of additional debt service to pay for new high-definition video boards in Beaver Stadium.

Revenue did not keep pace. Penn State reported drops in ticket sales, concessions and parking revenue and athletic contributions totaling $2.6 million for fiscal year 2013, which covers the 2012 football season. Revenue from ticket sales to sporting events was down $1.3 million, while contributions fell by $1 million.

Penn State's football attendance was down almost 5,000 per game from 2011 to 2012, when the team averaged 96,730 per game. Attendance remained essentially the same in 2013.

Increases in revenue from ticket sales for men's basketball and women's sports, which rose by 19 percent in fiscal year 2013, helped offset the lower football sales. Still, football generated 95 percent of the total ticket-sales revenue of $33.4 million.

Loan bridges the gap

In proposing the $30 million loan last fall, Joyner said the next five years would be "challenging" for the athletic department. Penn State projected a deficit of $5.5 million by fiscal year 2016-17. Officials expect cash reserves to turn positive again the following year.

The loan will subsidize short-term operating costs and projects that otherwise would have been shelved because of the deficit, according to officials. Specific projects are being evaluated, a spokesperson said.

Penn State's athletic department does not receive state or university support, and the loan is meant to preserve that status, Joyner said. Further, the athletic department will pay the $60 million NCAA fine without using state funds or contributions, a spokesperson said.

Money from the fine will come from football reserves, capital-project and maintenance deferrals and an internal loan.

"Penn State athletics has been self-supporting for decades, and we plan to remain that way," Joyner said. "We are taking on debt service for a few years until we are back to full speed and out of the sanction period."

Help on the way?

Joyner said that Penn State expects revenue from ticket sales, including for the new varsity hockey teams, and broadcast rights to increase in the future.

The Big Ten's current $1 billion television deal with ESPN/ABC expires in 2016, with negotiations projected to command a premium price. Penn State received more than $22 million last year from its NCAA and Big Ten contracts, which did not include bowl revenue.

In the second year of NCAA sanctions, Penn State has received relief in the form of restored football scholarships and could see its bowl ban end early. Mitchell, the athletics integrity monitor, said last year that he could recommend further reductions with his next annual report in September.

That would make a difference, as Penn State estimated the bowl ban would cost the department $21.6 million from 2012-16. The NCAA and Big Ten would have to approve any recommendation.

Then there's the buyout factor. By leaving for the Houston Texans, O'Brien was responsible for paying about $6.5 million in "liquidated damages" to Penn State. At Franklin's introductory news conference, Joyner was asked whether Penn State actually made a profit on O'Brien, whose 2013 salary was $3.3 million.

"I'm not sure we made a profit," Joyner said, "but that's why we have liquidated damages."

On filling the stadium

Members of Penn State's coaching staff, including Franklin, will embark on another caravan this spring to meet alumni and fans and to sell tickets. Last year, O'Brien made pitches across the state that a full Beaver Stadium was vital to the athletic department's financial health. His fellow coaches concurred.

"I'm sure people walk into [Beaver Stadium] looking for a football game," men's volleyball coach Mark Pavlik said, "but they really are supporting everybody under the [intercollegiate athletics] banner."

Franklin likely will make the same pitch, which he has begun already. On being introduced as head coach, Franklin promised that "the stadium will be sold out every single game from here on out."

Penn State has tried to help by generating new ticket packages and promising no price increases for season-ticket holders. The athletic department shifted to a variable-pricing model for single-game football tickets in 2014. Prices range from $40 for non-conference games to $200 for prime seats to the Ohio State game.

Jeff Garner, assistant athletic director for ticketing sales and service, said the public response to the new model has been mostly positive. He added that 85 percent of season-ticket holders have renewed for 2014 and 1,500 new packages have been sold since December.

In addition, a new program that allows recent graduates to buy season tickets at a 35 percent discount has sold nearly 500 packages since January. Garner said Franklin's hiring has produced additional sales.

"When we have 107,000 [fans at Beaver Stadium], it helps from a financial aspect, but it also helps with other things," Franklin said. "When we bring recruits to the spring game, and there's 80,000 people at the game, that sends a message, because there are only about five-10 programs in the country that can do that.

"It proves that football's important here. When you have 107,000 people going psycho [in the stadium], and another 100,000 in the parking lot eating hamburgers and hot dogs, that's what kids want. They want to go to a place where they can get a great education, but they also want to go to a place where football is important. And we're able to offer that."